Although accounting and tax outsourcing has long been widely used by companies in Europe and the USA, Russian business still has only a vague idea of this practice. The blame lies with the closed nature of the topic and the lack of "insider" information about the practical side of outsourcing. To fill that gap, we decided to describe in full detail the successful experience of outsourcing the accounting of a Moscow beauty salon chain. The financial director explains the stages of the project, the subtleties and difficulties of handing processes to a provider, and the results achieved.
We started thinking about outsourcing accounting back in 2009. The company has a specific organisational structure: 18 salons in Moscow, which are separate divisions with their own managers and their own business activity. We use piecework-and-bonus pay: payroll is calculated on the basis of the number of shifts worked, and remuneration is calculated as a percentage of revenue. At that time our accountants first calculated everything in Excel, then made exports from the internal management reporting system, rechecked the data, loaded it into 1C and so on. In short, a very large volume of routine operations was performed.
The business processes related to document flow and accounting were not built particularly well, and the existing standards were not fully observed.
In the crisis year of 2009 there was a need to think even more seriously about cost efficiency and reducing business costs, but at the same time we absolutely could not lose quality of service. The company had fewer people and each person's workload grew. If the chief accountant is under constant stress, they can leave at any moment, and finding a good replacement who can quickly fit into the team and perform professionally in the shortest possible time is problematic.
We had long been paying attention to various risks caused by the human factor and dependence on staff: for example, if an accountant is ill, the financial statements cannot be submitted on time, and if they leave, the life of the company freezes for a while.
At that time we had 11 in-house finance and accounting specialists for 450 employees. We thought about how efficiently those people were being used and realised that their salaries plus the costs and risks the business carries did not deliver the expected return.
Under the influence of all those factors, at a certain point we decided that the business needed better quality accounting. However, the decision to outsource the accounting function was not easy. After all, accounting is something sacred for any company, even if it is completely "white", as ours is. But the company has Western shareholders and Western-educated top management, so the understanding that outsourcing would minimise all existing risks and improve efficiency ultimately outweighed the fears and doubts.
The decision was based on an analysis of the offers available on the market. Since the company has a Western business model, we wanted the provider to have Western business processes too, a positive track record, good references and maximum customer focus.
In the end we considered three companies, compared the list and cost of services, the risks and guarantees, and chose UCMS Group.
We wanted to outsource accounting, payroll and HR administration entirely. However, we concluded that HR management is a key function in the company and we want to communicate with employees ourselves on all HR matters. So we kept even the routine record keeping in-house.
We handed the entire accounting function to the provider, except treasury in terms of payment planning and management accounting. We also fully delegated to UCMS Group the function of communicating with the tax authorities and various funds. So the company kept cash flow planning, which allowed us to retain management sensitivity, as well as the preparation of management reporting.
Since all our management accounting is built on the individual operating revenue and costs of each salon, one of the fundamental requirements for the provider was separate accounting for each business unit.
In addition, our management reporting system is based on the 1C platform, so the provider also had to keep the books in 1C to make data integration easier.
The agreement with the provider was reached in October 2010, and in November all processes were handed to UCMS Group. We were in a hurry because the period close deadline was approaching, so, frankly, there was no structured handover plan, nor were there detailed principles of interaction. We hastily set out in the contract what was being handed to the provider and in what form. All the other, no less important details and questions were agreed in the course of the interaction.
Naturally, the UCMS Group experts did not have time to carry out a full quality audit. They got up to speed as far as was possible in such a short time: they looked at the state of the reporting, the primary documents and the accounting database.
For our part we believed we had handed over perfect accounting and expected to get a closed period and submitted reporting very quickly, but that did not happen. On top of that, immediately after the handover we had to go through two on-site inspections by the Social Insurance Fund and one on-site inspection by the Pension Fund.
We dealt with the difficulties together, interacting and communicating very closely on all problem issues. I must note the customer focus of UCMS Group, which showed enormous loyalty to us as a client. On the provider's side we worked with Svetlana Makashina and her team, who showed fantastic dedication and focus on a positive result. Seeing that attitude, our employees were also ready to work hard and long on the project. Together we successfully passed the inspections and closed the period.
Of course, in the first months after outsourcing the accounting we encountered many pitfalls and it was very difficult.
Correct. We felt an acute need to create an interaction regulation about two months after the handover. In creating that regulation we tried to set out the whole chain of interactions, including responsibility for handing over documents, the procedure and deadlines for providing and submitting reporting on both our side and the provider's, and the deadlines for closing periods.
Naturally, outsourcing accounting required changes in our business processes and a redistribution of areas of responsibility within the company, which we also recorded in the regulation.
For example, we changed the profile of the salon managers, assigning them the function of interacting with accounting. Now the operations director is personally responsible for ensuring that the salon manager delivers properly completed primary documents, reconciliation statements with counterparties and reporting to the office every week. We also established that, having received the primary documents, the office manager must pass them to the provider on the same day.
Throughout 2011 the regulation was added to and edited; we improved our interaction with UCMS Group and brought it into line with the changing conditions and needs of the business.
Last year, for example, the shareholders set the goal of producing management reporting every month for deeper analysis and prompt decision-making, so the period close deadlines were significantly shortened and requirements on the provider increased in terms of the quality and speed of information. We also improved procurement and inventory processes in the salons and introduced electronic document flow with suppliers. All of that, of course, was reflected in the accounting.
We are a very dynamic company, and last year we made a genuinely serious leap forward. And if we ran, the provider ran alongside us. I can say that having accounting outsourced did not hinder the company's development at all.
All new requirements on our side were discussed with UCMS Group, and we always reached a constructive solution.
Today there is no thick line separating us as a client and UCMS Group as a service provider. Between us there is, rather, a thin dotted line. We get complete, high-quality, reliable accounting from the provider, and we are confident that under any circumstances we will get closed reporting and will be able to prepare analytics quickly and effectively and report to shareholders.
Notably, the provider's specialists communicate directly with our line staff, so stylists can get detailed information at any time, for example about how their pay is calculated. UCMS Group is with us hand in hand in operational activity. Now we live calmly, and that calm is precious for the business. So there is every reason to believe that outsourcing fully met our expectations.
We cut the staff of the finance function almost fourfold, from 11 to 3 people. If you count the total costs of sick leave, vacations, replacing staff through turnover, office rent, organising workplaces and storing accounting documents, it turns out that we did reduce costs. However, such direct savings turned out to be small, since the provider's services also cost money.
But when outsourcing accounting we set the goal not of reducing costs but of increasing their efficiency. From that point of view the gain was very substantial. For example, we freed the finance department's employees from routine operations, and now they devote more time to analysis and to developing the professional function.
We also understand that to keep up with current and forthcoming changes in tax legislation the company would have needed serious investment in staff training and improving the accounting system. Now the provider ensures all of that, and so we have reduced future costs as well.
I can say that this project has already paid for itself, and based on the results of 2011 the board of directors decided to continue using UCMS Group's services.
For example, we recently discussed with the provider the introduction of electronic document flow and dual accounting under Russian standards and IFRS.
This year we also intend to improve business analytics and the production processes related to document flow. We plan to optimise payroll systems and automate all accounting areas to improve the efficiency of business processes.
Accounting is the foundation of foundations of business, and we will keep honing our interaction with the provider to achieve perfection. We strive for ideal accounting.
You simply need to choose the service provider competently, understand and assess their level of professionalism and, of course, retain the control function yourself.
For example, we work with an audit firm that audits the provider's activity every year. Based on the interim audit carried out in the autumn of last year, we understood that our accounting complies not only with the requirements of Russian legislation but also with the high requirements of our shareholders. In Russia we have already adopted the foreign practice where serious companies providing accounting outsourcing insure risks and represent the client in resolving tax disputes.
So we are absolutely calm about our accounting and can focus on the business.
Svetlana Makashina, head of the accounting group at UCMS Group
For UCMS Group the project of keeping the accounting and tax records of a beauty salon chain was extremely interesting from a professional point of view. It is a large company with separate divisions, complex processes and specific payroll. The short handover timeframe was also a challenge for us that simply could not be declined.
As for the review that the provider carries out before taking on a client's accounting, in this case it really was carried out in a very short time. We reviewed the tax inspection reports and audit opinions, analysed the 1C database and looked at a sample of documentation for one of the salons. To understand how the business process works in the salons, we took part in an inventory of one of them.
Usually, when time allows, a detailed statement of work is prepared for the outsourcing handover, a kind of plan for transferring the affairs. It includes an analysis of the software and the submitted reporting, a sample check of primary documents, and an analysis of the financial and economic activity, organisational structure and management structure of the company. Analysing the client's existing 1C database makes it possible to understand the degree of its customisation and to find out what changes and integrations have taken place in all the client's databases. Particular attention should be paid to the client's internal software, that is, production databases other than 1C, but which allow automatic exchanges between them. We do not welcome changes to standard system configurations, so we recommend using external processing to avoid any problems in the future, including with updates. The statement of work also sets out the project coordinators and the responsible persons on the client's and the provider's side. Such a staged handover plan makes the transition painless.
In addition, the outsourcing contract records which accounting areas will be handed over and which will remain in-house, and sets out the technical side of service delivery. For example, the accounting system may be located either at the client's or at the provider's; we can either provide the client with our employees to work in the system or perform the work only on our side. The choice of how outsourcing services are delivered is highly varied.
Immediately after or during the handover, interaction regulations are always agreed. Often they describe interaction only between legal entities, but on this project we went further and regulated interaction between employees within the companies. We set out everything down to the smallest detail: what the sequence of actions is in a given case, which documents must be used, and at what time, down to the hours and minutes, information must be provided.
In 2011 the beauty salon chain went through great changes, as a result of which increasingly stringent requirements were placed on us as a provider. For example, the deadlines for closing periods and calculating payroll were significantly shortened. So, together with the client, we programmed special processing routines for 1C that allowed us to move away from manual work.
In general, at UCMS Group we are advocates of automation. It reduces timelines and costs, minimises the number of errors caused by the human factor and, despite the costly development and implementation, pays for itself quickly.
The widespread use of IT technologies, among other things, allows us to provide accounting services to legal entities located anywhere in the world. UCMS Group has offices and processing centres in Moscow, Saint Petersburg and Yaroslavl, connected by a single software system that allows data to be exchanged with all regional branches and clients and efforts to be distributed.
I can say that on this project we gained enormous experience of interacting with a client and meeting their growing needs, working with large and separate divisions, and also experience of automating our own software.
